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FHA Mortgage Insurance
FHA requires a mortgage insurance premium (MIP) for its homebuying programs. An up front premium of 1.50% of the loan amount is paid at closing and can be financed into the mortgage amount. In addition, there is a monthly MIP amount included in the PITI of .50%. Condos do not require up front MIP - only monthly MIP.
The mortgage insurance premium paid on an FHA loan is always significantly higher than on a conventional program. On an FHA loan the borrower will be charged a mortgage insurance premium equal to 1.50% of the purchase price of the property and a renewal premium of .500% in subsequent years. By contrast the mortgage insurance premium charged at closing on a conventional program is as low as .500% (with 10% down payment) with renewal rate in subsequent years as low as .300% in subsequent years.
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Refunds Ready on FHA Loans
If you have ever paid off a home loan backed by FHA, you may have money owed to you. And the government wants to pay you back.
About 1 in 10 FHA borrowers leave money in their escrow accounts when they pay off their loans. The average refund for each borrower is about $700.
Former FHA borrowers who think they might be due a refund can call a toll free number, 800-697-6967, or write HUD at P.O. Box 23669, Washington DC 20026-3699. Or you can look for your name with the HUD Refund Search Form
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Down Payment Gifts
The down payment can be 100% gift funds. This is one of the key benefits to the FHA program.
Verification of the source of gift money is not required. However, it is necessary that the gift funds be deposited in the borrower's bank or savings account, or in an escrow account, prior to underwriting approval. Proof of deposit is required.
Gift donors are restricted primarily to a relative of the borrower. They can also be certain organizations, such as a labor union or charitable organization. Contact your local branch for complete information.
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What Are Closing Costs?
There may be closing costs customary or unique to a certain locality, but closing costs are usually made up of the following:
- Attorney's or escrow fees (yours and your lender's if applicable)
- Property taxes (to cover tax period to date)
- Interest (paid from date of closing to 30 days before first monthly payment)
- Loan origination fee (covers lender's administrative costs)
- Recording fees
- Survey fee
- First premium of mortgage insurance (if applicable)
- Title insurance (yours and your lender's)
- Loan discount points
- First payment to escrow account for future real estate taxes and insurance
- Paid receipt for homeowner's insurance policy (and fire and flood insurance if applicable)
- Any documentation preparation fees
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Government-Sponsored Loans
The FHA and the VA, and the old Farmers Home Administration (now the Rural Housing and Community Development Service) are all established government loan programs.
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Qualifications / General Information
FHA-Insured
- Family housing expenses should not exceed 29% of gross income.
- Total debt should not exceed 41% of income Variety of loans ranging from fixed-rate to adjustable-rate.
- Down payments of 5 percent or less.
- Interest rates up to 1 percent less than market.
- No prepayment penalty.
- Assumable.
- Most closing costs can be included in loan.
- Borrower must buy mortgage insurance.
- Loan amount limited to $219,849 in high-cost areas and up to $121,296 in all others.
- Available through mortgage brokers and FHA-approved lenders.
VA Guaranteed
- Veterans of the armed services who obtain a certificate of eligibility from VA.
- Reservists are also eligible.
- Fixed-rate or adjustable-rate loans.
- No down payments.
- No prepayment penalty.
- Assumable.
- Loan amount limited to $203,000 (VA guarantee covers $50,750 on loans over $144,000).
- Available through mortgage brokers and VA-approved lenders.
U.S. Dept. of Agriculture Rural Housing/Community Development Service (formerly Farmer's Home Administration) Low- and moderate-income
- Families who want to buy rural property.
- Must meet income, job status and credit requirements.
- Only conventional fixed-rate loans guaranteed by program.
- Property must fall into USDA-designated rural areas.
- Closing costs and repairs can be included in loan if amount doesn't.
- Exceed home's market value.
- Available through USDA and lenders.
TIP: All of these loans can take longer to process than conventional loans. This may hinder your negotiations if the seller wants to close quickly. Be sure to budget enough time when you set your closing date.
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Other Special Loan Options
If you are short of cash or an entry-level buyer, you can apply for a number of low-down-payment loan programs, including special Freddie Mac and Fannie Mae mortgages as well as state and local first-time buyer programs.
The loan amount limits vary depending on the program and your
location, and can shut out buyers in high-priced metropolitan areas. Another problem is that some of the loan programs have income limits. If you earn over the limit, you won't qualify.
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Fannie Mae Programs
Two Fannie Mae programs illustrate how many of these loans work. The Community Home Buyers program offers loans with down payments as low as 3 percent. Participating lenders market it to prospective borrowers through a special home-buying seminar. (These free seminars are required for some Fannie Mae loan applicants, but anyone can attend). Seminars educate novice buyers about the process of buying a house and applying for financing, theoretically to make them better borrowers.
Fannie Mae's 97 percent loan program is available in most states. The 3 percent cash down payment must be from the borrower's own funds. The seller can credit a maximum of 3 percent of the purchase price for the buyer's nonrecurring closing costs. Standard ratio guidelines are used to qualify the borrower. The front-end ratio (housing debt to income ratio) cannot exceed
28 percent and the back-end ratio cannot exceed 36 percent. Good credit is required. To qualify for this loan program, the borrower's income cannot exceed a limit, which varies by location. The median income chart from the U.S. Department of Housing and Urban Development (HUD) is used to set the income limit.
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